Word has it that the framing of the budget, due to be handed down by Treasurer Josh Frydenberg the day after April fools day (and around 6 weeks before the election), is more problematic than usual.

Problematic because there is some mixed news on the economy that will threaten the current forecast of a return to budget surplus in 2019-20.

Housing has gone into near free-fall, both in terms of prices and new dwelling approvals. This is bad news for GDP growth. The unexpected severity of the housing slump is the key point that will see Treasury revise its forecasts for GDP growth, inflation and wages lower when the budget is handed down.

It will be impossible for Treasury to ignore the recent run of hard data, including the weakness in consumer spending and a generally downbeat tone in the recent economic news when it sets the economic parameters that will underpin its estimates of tax revenue and government spending and therefore whether the budget is in surplus or deficit.

The prospect that interest rates will be lowered within the next few months is already starting to impact on the economy.

Here’s how.

Around the middle of 2018, financial markets were expecting the RBA to hike official interest rates to 1.75 or 2 per cent over the course of the next 18 months or so. If proof was needed that investors and economists can get it wrong, markets are now pricing in official interest rates to be cut towards 1 per cent over the next 18 months.

The about face has been driven by a raft of disappointing news on the economy, most notably the fall in house prices, the free-fall in new dwelling building approvals and a slump in retail spending growth.

Business confidence has also taken a hit and job advertisements have been falling for eight straight months. Ongoing low inflation and increasing signs of a slowdown in the global economy have simply added to the case for this dramatic change in market pricing.

I gave a short statement to the House of Representatives Economics Committee on refundable franking credits in Sydney on 8 February 2019.

Below are the notes I used for that Statement which boiled down to two issues, the cost to the budget and how the policy is distorting investment decisions from investors and lazy financial planners.

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Tax policy is always riddled with trade offs.

No government wants to tax anyone more than it needs to, nor should it impose a tax regime that is unfair if it means cuts to services, a heavy tax impost on others in the community or adds unnecessarily to the budget deficit and government debt.

Labor’s policy on refundable franking credits will impact the budget bottom line by more than $5 billion a year.

Without the change, this $5 billion, or $100 million a week, means less money is available for the government to provide health care, roads, education, disability assistance and defence.

It is disconcerting that every dollar of refundable franking credits is currently borrowed by the government.

Australians love talking about interest rates and the bulk of economic commentary day-to-day is about whether or not the Reserve Bank of Australia will be putting them up, or down or leaving them steady at their next monthly meeting. This is no doubt linked to the huge interest of most Australians in house prices and the fact that household debt levels are amongst the highest in the world.

A small change in interest rates can have a significant impact on those with large mortgages.

Are interest rates too high or too low?

Having watching the RBA over the last 30 years or so, I have learnt a few lessons when it comes to working out whether interest rates are too high, too low or just right.

These lessons boil down to the following observable and easily tested facts on the economy.

The RBA Governor Phillip Lowe is giving a speech at the National Press Club next week, no doubt to recast the RBA’s view on the economy and to present its up-to-date thinking on monetary policy. This will include whether it still reckons the next move in official interest rates “is likely to be up”.

I don’t know what Dr Lowe will say or how the view of the RBA has changed since it last went public with its upbeat views on the economy in early December, but if I were RBA Governor, this is what I would say:

"The economy has not performed as we were expecting.

This is not to say that the economy is entering a period of trouble, far from it. But the economy is falling short of the optimistic outlook the RBA held for the bulk of the last year. The main areas of surprise are related to the housing downturn, both in terms of house prices and new construction, and the flow through of these trends to household consumption spending.

In addition to weaker than forecast GDP growth in the September quarter, the severity of the housing downturn is forecast to reduce GDP growth in 2019 and 2020. The downward revision to the forecast for household consumption growth is not being offset by unexpected strength elsewhere, hence the material change to the Bank’s overall growth outlook.

Prime Minister Scott Morrison has given a commitment that a Coalition government would create 1.25 million new jobs over the next 5 years.

Specifically, Mr Morrison tweeted, “I’m making a new pledge for our Government, to see 1.25 million jobs created over the next 5 years”.

This is a bold claim on any measure. Alas for Mr Morrison, the claim is at odds with his Treasurer's recent MYEFO estimates which included a series of forecasts and projections for employment growth over those 5 years. It is easy to cross check. Using Treasurer Josh Frydenberg’s forecasts in MYEFO, cumulative employment growth over the next 5 years will be just 954,000, some 296,000 below the figure that Mr Morrison seems to have plucked out of the air.

There is no doubt the Australian economy was weaker in late 2018 than it was during the first half of the year. It seems to have kicked off 2019 on a similarly weak note.

Recent economic news has been unambiguously poor and it follows the dismal GDP results released last month which showed per capita GDP falling 0.1 per cent in the September quarter. That was a poor result and forced most thinking economists to revise down their assessments of Australia’s economic health. If the upcoming December quarter GDP result, which is due for release in early March, reveals another drop in per capita GDP, the economy on a per capita basis will be going backwards.

This, quite clearly, is not good news.

It means living standards for the average Australian are falling and it poses questions about the current stance of economic policy.

There will be a Federal election within the next four months and the main question is the exact date when we will go to the polls. The current speculation focuses on three dates – relatively early on 2 March or nearer full term on 11 or 18 May.The decision will be taken by the Prime Minister, Scott Morrison, over the next few weeks.

One issue which will undoubtedly be critical to his thinking on the timing of the poll will be the economic data flow that will be released during the election campaign.

Just think – getting a poor GDP result or a rise in unemployment or weak wages data slap bang in the middle of the campaigning. It could be enough to derail the election strategy of the government and further erode its economic credentials. It is also important because the economy is clearly weakening. House prices are falling sharply, destroying the wealth of home owners, wages growth remains weak, the stock market is sick and consumer spending is unsurprisingly slow. There is also evidence in the various job advertisement series that the labour market is cooling which could see the unemployment rate creep up in the months ahead.

2 March Vs 18 May

The economic calendar suggests Mr Morrison would be wise to call the election for 2 March.

I am sorry to kick off the new year with some gloomy news of your finances.

It is never nice to discuss how much money you have lost, but if you are a home owner in Sydney, Melbourne, Perth or Darwin and if you have a superannuation nest egg, the odds are you are less wealthy today than you were a year or two ago.

Here are some uncomfortable facts.

The Australian stock market, where the bulk of your superannuation assets are likely to be invested, has slumped 11 per cent since August, reducing the value of stocks by around $200 billion. No doubt your superannuation has suffered part of this loss.

At the same time, home owners in Sydney, Melbourne, Perth and Darwin are seeing the value of their homes getting crunched.

Falling dollar reflects global concern all is not well in the Australian economy

The Australian dollar was hit hard overnight, Australian time, slumping below 70 US cents before a sharp and more extreme move saw it temporarily crash to a low of 67.40 US cents. It subsequently recovered marginally, but remains weak at around 69.40 US cents.

Rather than focus on the micro aspects of minute-by-minute or hour-by-hour moves in the dollar, which can be more noise than substance, the trend for the dollar over the past year has been down.

In January 2018, the Australian dollar was trading at 81.50 US cents.

There is increasing concern from global investors that all is not well with the Australian economy. Policy is in a do-nothing phase. Entrenched low wages growth is hampering growth in household spending. This is being complemented, in a negative way, by a sharp fall in wealth as house prices drop and the share market weakens, both of which will be a negative for the economy during 2019. This is because householders are simply not getting the income growth nor wealth accumulation needed to allow them to keep spending at a rate that will see the economy expand at a pace that will generate upside wage and inflation momentum. Strategies aimed at reducing debt and paring back new borrowings mean, by definition, weaker economic growth over the near term.

Word has it that the framing of the budget, due to be handed down by Treasurer Josh Frydenberg the day after April fools day (and around 6 weeks before the election), is more problematic than usual.

Problematic because there is some mixed news on the economy that will threaten the current forecast of a return to budget surplus in 2019-20.

Housing has gone into near free-fall, both in terms of prices and new dwelling approvals. This is bad news for GDP growth. The unexpected severity of the housing slump is the key point that will see Treasury revise its forecasts for GDP growth, inflation and wages lower when the budget is handed down.

It will be impossible for Treasury to ignore the recent run of hard data, including the weakness in consumer spending and a generally downbeat tone in the recent economic news when it sets the economic parameters that will underpin its estimates of tax revenue and government spending and therefore whether the budget is in surplus or deficit.

The prospect that interest rates will be lowered within the next few months is already starting to impact on the economy.

Here’s how.

Around the middle of 2018, financial markets were expecting the RBA to hike official interest rates to 1.75 or 2 per cent over the course of the next 18 months or so. If proof was needed that investors and economists can get it wrong, markets are now pricing in official interest rates to be cut towards 1 per cent over the next 18 months.

The about face has been driven by a raft of disappointing news on the economy, most notably the fall in house prices, the free-fall in new dwelling building approvals and a slump in retail spending growth.

Business confidence has also taken a hit and job advertisements have been falling for eight straight months. Ongoing low inflation and increasing signs of a slowdown in the global economy have simply added to the case for this dramatic change in market pricing.